Brooke’s Note: I spoke separately to the two people RIABiz had covering FPA’s Boston confab, Graham Thomas and Sanders Wommack, and got one big takeaway: Marcia Wagner. What she managed to accomplish in her speech was pretty monumental. She took the seemingly dead battery of DOL alarm and alarmed people anew. In an accent that leaves no doubt about what baseball team she roots for, and with an authority that assures we will be listening to her words for years, Wagner gave a wide overview and some solid specifics on the Department of Labor’s determination to put clients first come what may. You say you’re a fiduciary? Maybe you shouldn’t say that too loud.

Significant, Wagner says, because the longed-for cut-and-dried definition of what it means to be a fiduciary advisor is anything but.

“The DOL also has an alternative way in which one can be a fiduciary, and this, to me, is slightly disconcerting. If a fiduciary advisor were to hold itself out as such, even inadvertently, then that person will be subject to the ERISA fiduciary standard.”

She continued: “There need not be a mutual understanding at all, just a unilateral understanding by the recipient of the information. This is where loose lips sink ships. So, for example, be very careful in your newsletters; don’t use the word fiduciary. Be very careful when you speak orally; make very clear what is educational and what is not educational — what is fiduciary, and what is not.”

Really BIC show

The newly proposed regulatory regime is full of pitfalls for uninformed advisors, especially the “best interest contract” exemption — the contract clients must sign if so advisors can charge variable compensation like 12(b)1 fees or commissions.

“The BIC is a very interesting piece of rule-making,” said Wagner, “As a technical matter, the Department of Labor does not have jurisdictional authority, or control, or enforcement, over IRAs. The DOL is afraid that some financial advisors will basically say, 'Well, you can’t do anything to me so I’m not going to comply with this rule.’ So the DOL effectively said, 'if you want the BIC exemption you have to effectively bake into it that the tort bar can enforce a private right of action.’”

Extension, please

“Even those of you that don’t feel as if you deal in the 401(k) and it doesn’t affect you, it will affect you through IRAs,” warned Wagner. “Moreover, I think this is going to be a lot of work for broker-dealers and insurance companies dealing with the disclosures and mitigating conflicts of interest. There have been comment periods, two of them, and there have been open hearings, I believe this will be effective before the end of the Obama administration, which is January 2016, which means we’ll see finalized rules by May 2016, if not sooner.”

“We suggest modification and clarification. We think some of the parts about compliance are onerous so we’ve suggested ways they can be simplified so it helps both the advisor, the firm, and the client understand it better,” says Karen Nystrom, director of advocacy at FPA.

Marcia Wagner: This is where loose lips sink ships.

With honey

Gjertsen said the requested modifications were practically identical to those he was asked for by those industry groups or wrote to the DOL in opposition to its proposals. In fact, he told reporters at a media roundtable Sunday that the FPA’s comment letter was only distinguishable from anti-DOL regulation comment letters in its first sentence where it expressed support instead of opposition.

Two months ago, in exactly the same building, another industry leader made similarly contradicting comments. At LPL Focus, disgusted CEO Mark Casady ripped the proposed rules in a keynote, telling attendees, “there needs to be changes in this regulation, and it needs to be significant.” See: LPL Financial tosses its sales pitch to 7,000 in its HQ city of Boston

But Nystrom suspects the schizophrenic gap between words and actions might just be a sophisticated bargaining strategy on the part of the Department of Labor.

“Part of the strategy of embracing the DOL’s fiduciary rule-making, is, if you’re embracing it and then coming in for a friendly conversation you get a much better reception than if you’re just pounding your fist on the table and saying it’s unworkable.”

Catch-22

The fate of cheaper, sensible, financial advice for retirees depends upon this strategy to succeed.

If regulators aren’t charmed and the rules stay as proposed, Wagner believes those advisors who earn higher compensation in IRAs than 401(k)s will be in the awkward position of having to get potential rollover clients to sign a lengthy “best interest contract” without being able to tell him what they’re buying. Because of the advisor’s compensation scheme, doing so could be construed as self-dealing.

“Basically, if you want to capture rollovers, with certain exemptions, the BIC exemption is how you’re going to have to go,” said Wagner in her address.

Justify your fee

That one of the foremost experts on ERISA law admitted she was unable to see a way out of this bind was, for the optimistic in the audience, a sign a fix would certainly come when the Department of Labor releases its final rules. If it doesn’t, advisors will be in the ghastly position of having to navigate a Catch-22 to land rollovers as the tort bar scrutinizes them for missteps.

For now, Wagner says the best way to protect yourself and your business from these new ERISA rules is to provide objective justification for your fees.

It’s got legs

Towards the end of her keynote, Wagner shifted away from fiduciary standards and into a discussion about potential tax and benefit reform. She stressed that legislators and policy makers are hungrily eyeing the mountains of foregone revenue from the current tax-qualified retirement system. Tax breaks in defined benefit, defined contribution and IRAs will save investors (and cost the government) about a trillion dollars over the next five years, making it a huge target for the tax reform. See: Big chill: Worried RIAs and other 401(k) leaders gather in Chicago in hopes of saving the goose.

The next few years will be critical as lawmakers in Washington and the various state capitals work to overhaul various pension plans as U.S. citizens’ life expectancy increases. One of the key goals of the Obama administration, Wagner said, is to ensure that Americans not outlive their retirement savings and that people are incentivized to annuitize all, or a portion, of their 401(k) balances.

Stephen Winks said:

October 6, 2015 — 3:46 PM UTC

After decades of broker/dealers ignoring their fiduciary responsibilities of serving in the best interest of the “retail” investing public, there is a simple non-controversial solution—simply acknowledge and support the fiduciary standing of the broker. The brokerage industry’s denial of the “retail investor” the same consumer protections accorded to all other investors is self defeating as “retail brokers” have everything to lose if there is no enthusiastic b/d support for fiduciary duty and the professional standing of the broker when rendering advice.

SCWStephen Winks

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